Research

Publications

Working Papers

Abstract

This paper reconsiders whether monetary policy in small open economies responds to exchange rates by studying possible parameter instabilities in a Dynamic Stochastic General Equilibrium model. The main focus of the paper is to revisit preceding evidence on the response to exchange rate movements by the Bank of England and determine if its reaction function has remained constant throughout the sample. To this end, I estimate a small open economy general equilibrium model using Bayesian econometric techniques over rolling windows. I find overwhelming evidence of shifts in several parameters, including those related to the policy rule. Furthermore, posterior odds tests reveal a time-varying response to exchange-rate fluctuations by the monetary authorities. The results favor the model with the nominal exchange rate embedded in the policy rule for the initial subsamples. However, the evidence weakens and ultimately favors the model with no exchange rate for the latter ones. The paper also documents evident variations in the model dynamics derived by the instability of parameters via rolling-window impulse response functions and variance decomposition analysis.

Abstract

Recent literature suggests that psychological factors explain a substantial part of the fluctuations in the US business cycle. While these factors have started to be included in new empirical research, the forecast properties of these models are yet to be explored. This paper tests the forecast performance of a small-scale DSGE model with sentiment shocks. The assumption of rational expectations is relaxed, instead agents are assumed to behave in a near-rational fashion: every period they learn and update their beliefs using a constant gain learning algorithm. Sentiment shocks are captured by exploiting observed data on expectations and are defined as the deviations from the model implied expectations due to exogenous waves of pessimism or optimism. The forecast evaluation is accomplished by comparing the root mean squared prediction error of the benchmark 3-equation New Keynesian model at different horizons and under different expectation assumptions: rational expectations, learning, and learning with sentiment. The results show that the model with learning and sentiment shocks is not only able to compete with the other two alternatives, but it is generally better to forecast the output gap and the inflation rate.

Abstract

This paper tests and validates the hypothesis that outsourcing increases when the production process has a high intensity of child labor. The novelty of the paper lies in developing a child labor intensity index using data from the Department of Labor’s Bureau of International Affairs reports together with the US Input-Output Matrix.  We show that child labor is a crucial determinant of the form of international organization. In addition, the paper shows evidence that two often practiced mitigating measures to combat the use of child labor, the use of media critique and the use of international labor standards, don’t reduce outsourcing all the time in a regulatory void.

Abstract

Bans on child labor as mitigating measures to avoid the abuse of child labor have now been widely recognized to be ineffective and may be costly for low- and middle-income countries. This paper explores how the existence of immigrant workers, a common economic condition for many of these countries, can be effectively used as a novel and cheap mechanism to mitigate the employment of child labor. We show that when immigrant workers are available at a discount wage, profit-maximizing firms will switch from using child labor. From a policy standpoint, this suggests that conditions can be generated to move the economy to a no-child-labor equilibrium. Although the solution may be a second-best for immigrant workers, it may help avoid the undesirable social consequences of child labor and, at the same time, ease the economic and socio-economic worries about immigration.